Differences between Ordinary Liquidation and Corporate Bankruptcy
- Liquidation is the process of settling the legal affairs of a dissolved company, involving the termination of remaining business, liquidation of company assets, collection of receivables, repayment of debts, and distribution of remaining assets to shareholders.
- Ordinary liquidation occurs when it is expected that the company’s assets will be sufficient to fully pay off its debts. However, if the company is insolvent (i.e., its debts exceed its assets), bankruptcy proceedings must be initiated to handle the liquidation.
- Bankruptcy proceedings, governed by bankruptcy laws, are initiated when a debtor is unable to pay debts or is insolvent. In these proceedings, a bankruptcy trustee appointed by the court conducts the liquidation under court supervision.
- If, during the ordinary liquidation process, it becomes evident that the company is insolvent, the liquidator must immediately file for bankruptcy (Companies Act Article 484, Paragraph 1). However, if the liquidator files for special liquidation, failing to file for bankruptcy does not constitute a breach of duty unless it becomes clear that special liquidation will not conclude satisfactorily.
Differences between Special Liquidation and Corporate Bankruptcy
- Special liquidation, similar to bankruptcy proceedings, is a type of liquidation bankruptcy procedure. It is characterized by the principle that the existing liquidator continues to manage the liquidation affairs, and the repayment is made according to an agreement approved by a majority of creditors under Article 563 and subsequent articles of the Companies Act.
- Special liquidation can be faster and less expensive than bankruptcy proceedings, which require the appointment of a bankruptcy trustee if a majority of creditors are expected to agree to the rights alteration under the agreement.
- However, if creditors do not trust the liquidator (Typically, the former directors are appointed as liquidators, but creditors may not trust the former directors who have led the company into bankruptcy), and an agreement cannot be reached, bankruptcy proceedings become necessary.
Articles
- Japanese Corporate Law 1 (Differences between Stock Companies and Limited Liability Companies)
- Japanese Corporate Law 2 (Board of Directors, Shareholders’ Meeting, Annual Reporting Obligations)
- Japanese Corporate Law 3 (Corporate Governance)
- Japanese Corporate Law 4 (Dissolution and Liquidation)
- Japanese Labor and Employment Law 1 (Dismissal Regulations)
- Japanese Real Estate Law 1 (General Overview)
- Japanese Data Privacy Law 1 (the APPI regulations for Foreign Companies)
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- Japanese Competition Law 1 (General Overview)
- M&A Laws in Japan 1 (Significance and Characteristics of M&A Laws in Japan)
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- Renewable Energy Project Finance in Japan 2 (Amendment on the Act on Special Measures Concerning Renewable Energy Requiring Resident Briefings Effective April 1, 2024)